Opinion of the Commission

Associated person of member of a registered securities association failed to supply information requested by association in a timely manner. Held, association's findings of violation and sanctions it imposed sustained in part and set aside in part.

Sundra Escott-Russell, a former investment company and variable contracts principal of Primerica Financial Services, Inc. ("PFS"), a member of the National Association of Securities Dealers, Inc. ("NASD"), seeks review of disciplinary action taken against her by the NASD. The NASD found that Escott-Russell violated NASD Conduct Rules 2110 and 3030 by engaging in outside business activity without giving prior written notice to her employer. 1 The NASD further found that Escott-Russell failed to supply information requested by the NASD during its investigation of the matter, in violation of NASD Conduct Rule 2110 and Procedural Rule 8210. 2 It censured Escott-Russell and fined her $8,000. 3 We base our findings on an independent review of the record.

II.

At all times relevant to this case, Escott-Russell was, in addition to being a principal of PFS, an Alabama state senator. In early 1994, Escott-Russell was introduced by a friend, Mattie Day, to Andre Brady, the president of Wealth International Network ("WIN"). Although WIN was later exposed as a fraudulent pyramid scheme, 4 at the time Escott-Russell believed WIN to be a legitimate means by which her constituents could earn money for themselves as well as for their churches and other charitable causes.

Escott-Russell spoke at two WIN conventions. 5 She also told several people about WIN, all of whom became members of WIN. Day advised Escott-Russell that she would receive a "gift" membership in WIN. Day told Escott-Russell that this "gift" included placement in a WIN "hierarchy" and a subscription to WIN's newsletter. Day further explained that subscription holders "received monthly rebates from the company's total subscription sales." And, in fact, from February to June 1995, apparently after all her other contacts with WIN had ended, Escott-Russell received a series of checks from WIN totaling $884.64.

In July 1995, PFS obtained a WIN brochure in which Escott-Russell's picture appeared with a caption describing her as a leader of WIN. 6 PFS conducted an investigation, and concluded that Escott-Russell had violated a firm policy that prohibited employees from affiliating with any non-PFS company without prior written approval. Escott-Russell was allowed to resign.

PFS notified the NASD of Escott-Russell's resignation and of her activities with WIN. The NASD staff wrote a letter to Escott-Russell on November 3, 1995, requesting that she submit information regarding her association with WIN. Escott-Russell responded fully to this request in a letter dated November 21, 1995.

On February 13, 1996, the NASD staff requested that Escott-Russell submit additional information. On February 26, the staff received a letter from an attorney representing Escott-Russell, alleging that the Alabama Department of Revenue was involved in racially-motivated and illegal investigations of African-Americanstate legislators in Alabama. He sought assurances from the NASD that its investigation of Escott-Russell was not connected with such alleged actions by the Alabama Department of Revenue and stated that Escott-Russell would not respond to the NASD's requests for information until it provided the attorney with a "substantial amount of preliminary information." Specifically, he asked to receive copies of all oral and written complaints and any other documents in the NASD's investigative files with regard to Escott-Russell before he would allow his client to respond.

On February 29, 1996, in a letter addressed to Escott-Russell and copied to her attorney, the NASD staff assured Escott-Russell that it was "unaware of any investigation by the Alabama Department of Revenue, and [that the Alabama Department of Revenue] matter has no relation to [the NASD] investigation." In addition, the staff advised Escott-Russell that it does not, as a matter of course, produce documents during an investigation, but indicated that its investigation was based at least in part on the Commission's proceeding against WIN in the United States District Court for the Northern District of Georgia and that relevant documents could be obtained from that court. The NASD staff reminded Escott-Russell of her obligation to respond to the February 13 request and set a new deadline of March 7. Escott-Russell did not respond.

In a letter dated March 13, 1996, the staff again requested the information specified in its February 13 letter. A week later, Escott-Russell's counsel replied that he had not received the materials that he had requested "as a preliminary condition to advising his client to participate in [the] investigation." Escott-Russell never submitted the information requested by the NASD in its February 13 letter.

On November 25, 1996, an NASD District Business Conduct Committee ("District Committee") charged Escott-Russell with violating NASD Conduct Rules 2110 and 3030 and Procedural Rule 8210. The complaint alleged that Escott-Russell engaged in "selling public customers newsletter subscriptions for which she received compensation totaling approximately $884.64." The complaint further alleged that Escott-Russell had failed to respond fully and adequately to NASD requests for information. The District Committee held a hearing and found that Escott-Russell had violated NASD Conduct Rules 2110 and 3030 and Procedural Rule 8210. It censured her and fined her $8,000. The National Adjudicatory Council affirmed the District Committee's findings and the sanctions imposed. This appeal followed.

III.

A. Outside Business Activity

Although the facts described above warranted the NASD's investigation of and proceeding against Escott-Russell for violation of Rule 3030, we do not find the record sufficient to establish the alleged violation of that rule.Accordingly, we must set aside the NASD's determination that Escott-Russell violated Rule 3030 as well as the related sanctions.

B. Failure to Respond to Requests for Information

The NASD found that Escott-Russell failed to supply the information requested in its February 13, 1996 letter, thereby violating NASD Conduct Rule 2110 and Procedural Rule 8210.

Escott-Russell argues that she responded completely to the NASD's requests, as evidenced by the several letters from her and her counsel between November 1995 and March 1996. The correspondence received by the NASD from Escott-Russell from November 1995 to March 1996, however, provided information only with respect to the NASD's November 1995 request and was not responsive to the NASD's February 1996 request for additional information. The correspondence from Escott-Russell's counsel was not responsive to any request for information, but, rather, demanded information from the NASD as a condition for Escott-Russell's cooperation.

Escott-Russell also argues that she responded to the NASD's requests for information through testifying at the hearing. Even if her testimony had included the information that the NASD had sought in its February 1996 request, however, the fact that she waited more than a year to cooperate would be enough to find that she violated NASD Procedural Rule 8210. 7 "The NASD should not have to bring a disciplinary proceeding and entertain an appeal in order to obtaincompliance with its rules relating to investigations." 8 The NASD has a right to request information and require cooperation from those persons it investigates. When persons delay their cooperation until the day of the hearing, they subvert the NASD's ability to perform fully its investigations. 9 Thus, Escott-Russell's cooperation with the NASD's November 1995 request for information and her testimony at the hearing did not cure her failure to respond fully and timely to the NASD's February 1996 request for information.

Escott-Russell argues that she acted on the advice of counsel in not responding to the NASD's request for information until receiving assurance that the NASD was not involved in an alleged racist scheme of the Alabama Department of Revenue. Escott-Russell was "not free to impose conditions on [her] responses." 10 As we have said many times, "[r]eliance on counsel is immaterial to an associated person's obligation to supply requested information to the NASD." 11 Escott-Russell was not relieved of her obligation to respond to the NASD's requests by her lawyer's advice. 12 TheNASD's finding of Escott-Russell's failure to respond and refusal to cooperate is clearly supported by the record.

C. Due Process

Escott-Russell argues that she was denied due process of law and other constitutional protections. 13 For example, she asserts, without support, that the District Committee failed to "follow its own rules," that it failed "to recognize [her] right to have her attorneys question the investigative process," and that it failed "to deal with [her] in a manner which is consistent with the strictures of its own rules . . . ." She also asserts that the NASD rules were applied to her in an unconstitutionally vague manner. Escott-Russell, however, fails to specify those rules that the NASD failed to follow and/or applied vaguely. Nor does she state how the NASD hindered her lawyer's ability to represent her.

We find that the NASD accorded Escott-Russell all necessary process. Section 15A(h)(1) of the Securities Exchange Act of 1934 requires NASD proceedings to be fair. 14 Specifically, Section 15A(h)(1) requires that specific charges be brought, that notice be given of such charges, that an opportunity to defend against such charges be given, and that a record be kept. These procedural safeguards were satisfied here. Escott-Russell was given notice of the charges against her. A hearing, in which she and her counsel participated and at which she was given an opportunity to confront and cross-examine adverse witnesses and to present her own case and witnesses, was conducted on the record. Finally, the NASD issued a formal written opinion. 15

Escott-Russell argues that she was forced to give sworn testimony while the other witnesses at the hearing were allowed to testify without taking an oath. Escott-Russell's assertion here is incorrect because she neither was required to nor gave sworn testimony at the hearing. She testified via telephone without being under oath. 16 The only sworn statement in the record is the affidavit executed by Escott-Russell as a part of PFS's investigation of her involvement with WIN. 17

Escott-Russell further asserts that she was denied the right to "advice of counsel" and "response via counsel[.]" Escott-Russell, however, was represented by counsel at the hearing and in correspondence sent to the NASD staff. 18 As previously stated,despite her argument to the contrary, Escott-Russell's reliance on the advice of her counsel in not responding to the NASD's requests for information does not shield her from liability.

IV.

We may cancel, reduce, or require remission of a sanction imposed by the NASD where we find, having due regard for the public interest and the protection of investors, that the NASD's sanction is excessive or oppressive or imposes an unnecessary or inappropriate burden on competition. 19 As noted above, we are unable to find a violation of Rule 3030 on this record, and therefore have set aside the NASD's sanctions with respect to this alleged violation. As for Escott-Russell's violation of NASD Conduct Rule 2110 and Procedural Rule 8210 (failure to supply information), the NASD considered her reliance on her counsel's advice and chose to limit the sanction to an amount less than the minimum. 20

The monetary sanction imposed is below the minimum amount and is fully warranted. Moreover, the censure is not unreasonable, especially since no suspension was imposed. We do not find the sanctions to be excessive or oppressive.

ORDER SUSTAINING IN PART DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION

On the basis of the Commission's opinion issued this day, it is

ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Sundra Escott-Russell be, and it hereby is, sustained in part and set aside in part; and it is further

ORDERED that the disciplinary sanctions assessed be, and they hereby are, sustained, except that the fine imposed is reduced by $1000; and it is further

ORDERED that the Association's assessment of costs be, and it hereby is, sustained.

By the Commission.

Jonathan G. Katz
Secretary

Footnotes

Conduct Rule 2110 states that "[a] member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." Conduct Rule 3030 states that "[n]o person associated with a member in any registered capacity shall be employed by, or accept compensation from, any other person as a result of any business activity, other than a passive investment, outside the scope of his relationship with his employer firm, unless he has provided prompt written notice to the member . . . ."

Procedural Rule 8210 authorizes the NASDto "require a . . . person associated with a member . . . to provide information orally, [or] in writing . . . with respect to any matter involved in the investigation . . . ." and provides that "[n]o member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule."

Escott-Russell was fined $1,000 for her failure to disclose to her firm her compensation from outside business activity and $7,000 for her failure to respond to the NASD's requests for information. The NASD also assessed costs. The NASD did not impose a suspension, noting that Escott-Russell had been out of the securities industry for over two years and would be required to requalify before becoming registered again.

PFS contacted Escott-Russell and advised her of the representation in the brochure. Escott-Russell twice requested that her picture and any reference to her be removed from the brochure, and that she be removed from any WIN membership and subscription lists.

In any event, Escott-Russell's testimony at the hearing included none of the information requested in the NASD's February 13, 1996 letter. For example, in that letter the NASD asked Escott-Russell, among other things, to provide the names of her brother and sisters and the name of her church; it asked about details concerning the tennis tournament sponsored by WIN; it asked for copies of the commission checks as well as evidence that the money was donated to her church; and it asked how and on what date she discovered that she had been given a gift subscription to the WIN newsletter. None of these questions, nor any of the other questions in the February 13, 1996 letter, was answered.

Brian L. Gibbons, 52 S.E.C. 791, 794 (1996). See alsoStedman, 51 S.E.C. at 1231; Richard J. Rouse, 51 S.E.C. 581, 585-56 (1992) ("Members cannot be permitted to impose conditions under which they will provide information to the NASD, including determining the appropriate time for responding to such requests."). We note that the NASD nonetheless told Escott-Russell that its investigation of her was unrelated to the Alabama Department of Revenue and also told her how she could obtain certain documents relevant to the investigation.

SeeMichael David Borth, 51 S.E.C. 178, 181 (1992) ("A registered representative is responsible for responding directly to the NASD's requests for information."). The NASD reminded Escott-Russell in writing of her obligation to cooperate, stating that "while you have the right to retaincounsel, the responsibility . . . to respond to requests for information rests solely with you."

Since we have dismissed the "Outside Business Activity" charge, any due process claim with respect to that allegation is moot. Escott-Russell also asserts that the NASD failed to provide her notice under Procedural Rule 8221. SeeNASD Manual (CCH) at 7244 (Jan. 1999). Rule 8221 applies only to suspension proceedings, while this case, a regular disciplinary proceeding, is governed by the notice provisions of NASD Procedural Rule 9000, etseq., which were complied with here.

Because the NASD is not a state actor, constitutional and common law due process requirements do not apply. SeeDesiderio v. NASD, 2 F. Supp. 2d 516, 519 (S.D.N.Y. 1998), aff'd, 191 F.3d 198 (2d Cir. 1997); Datek Sec. Corp. v. NASD, 875 F. Supp. 230, 233 (S.D.N.Y. 1995) ("[T]he NASD is a private corporation not subject to the strictures of the Constitution."). We have analyzed Escott-Russell's claim under Section 15A(h)(1), the statute applicable to the NASD as a private actor. But we would reach the same result even if we were to analyze the issue under the constitutional provision. Due process is "the opportunity to be heard at a meaningful time and in a meaningful manner." Mathews v. Eldridge, 424 U.S. 319, 333 (1976). Due process is present where there has been adequate notice of the charges, an opportunity to defend against those charges, and the opportunity to confront and cross-examine adverse witnesses. Richard W. Perkins, 47 S.E.C. 847, 849 (1982).

Escott-Russell also argues that her testimony at the hearing with respect to the Rule 3030 (outside business activity) charge was ignored in favor of an earlier affidavit that she executed during the PFS investigation. Because we have set aside the NASD's finding of a Rule 3030 violation, we do not address this argument.

SeeNASD Sanction Guidelines (1996 ed.) at 22 (Failure to Respond or Respond Truthfully or Completely; Failure to Respond in a Timely Manner). A fine of $10,000 to $20,000 is recommended for a failure to respond to a request for information. The NASD imposed a fine of $7,000 on Escott-Russell. SeealsoFarni, 51 S.E.C. at 1120 (reliance, while not excusing the violation, can be a mitigating factor in assessing sanctions).